“We achieved strong second quarter consolidated revenue growth led by robust double-digit growth in our fitness, marine and aviation segments,” said Cliff Pemble, president and chief executive officer of Garmin Ltd. “We introduced revolutionary products and are pleased with our performance in the first half of 2018. The results we achieved thus far in 2018 give us confidence to raise our full year guidance, and we look forward to the remainder of the year.”
Fitness:
During the second quarter of 2018, the fitness segment posted robust revenue growth of 24% driven by strength in advanced wearables and cycling. Gross margin was consistent year-over-year at 56% while operating margin increased to 23%, resulting in operating income growth of 40%. During the second quarter, we launched the vívoactive 3 music expanding our music offerings into the advanced wellness category. We also launched new Edge® and VariaTM cycling products providing growth to our cycling category with innovative new products and a continued focus on cyclists’ safety. We continue to see opportunities for advanced wearables within the fitness segment.
Marine:
The marine segment posted robust revenue growth of 24% driven by organic growth across multiple product categories and our Navionics® acquisition. Gross margin increased year-over-year to 59%. Operating margin declined to 21%, however operating income grew by 14%. During the second quarter of 2018, we introduced the award winning Panoptix LiveScope, a live scanning sonar that allows anglers a real-time clear image in front of, below, and around their boat. Additionally, we were selected as the exclusive marine electronics supplier to Sportsman Boats beginning in model year 2019. We remain focused on innovations and achieving market share gains within the inland fishing category.
Aviation:
The aviation segment posted robust revenue growth of 23%. Gross and operating margins were strong at 74% and 34%, respectively, resulting in operating income growth of 34%. Growth was primarily driven by our ADS-B offerings and recent new product introductions such as the G5 indicator system, TXi displays, and the GFCTM 500/600 autopilots. We introduced the G3000HTM integrated flight deck for the Part 27 turbine helicopter market. In addition, we were recently selected by Tactical Air Support to provide a tandem integrated flight deck to their fleet of F-5 supersonic aircraft. We continue to invest in upcoming certifications with our OEM partners and ongoing aftermarket opportunities.
Outdoor:
During the second quarter of 2018, the outdoor segment grew 4% with growth contributions from all product categories. Gross and operating margins remained strong at 64% and 36%, respectively. We launched the fēnix 5 Plus series, adding color maps, Garmin Pay mobile payments and music to all three watch sizes. We also expanded our sensor technology with the addition of Pulse Ox to the fēnix 5X Plus for blood oxygen saturation awareness for athletes and outdoor enthusiasts. We launched the inReach® mini, a compact satellite communicator that allows for two-way communication from anywhere. Additionally, we have seen positive customer response to our premium golf offerings. Looking forward, we remain focused on opportunities in wearables and other product categories within the outdoor segment.
Auto:
The auto segment recorded a decline in revenue of 19% in the second quarter of 2018, primarily due to the ongoing PND market contraction. Gross and operating margins were 42% and 7%, respectively. Looking forward, we are focused on disciplined execution to bring desired innovation to the market and to optimize profitability in this segment.
Additional Financial Information:
Total operating expenses in the quarter were $306 million, an 11% increase from the prior year. Research and development increased 11% driven by the incremental costs associated with acquisitions, investments in the outdoor and fitness segments for the development of advanced wearable products and continued innovation in the aviation segment. Selling, general and administrative expenses increased 14% driven primarily by personnel related expenses and incremental costs associated with acquisitions. Advertising expenses increased 4% year over-year but were relatively flat as a percentage of sales.
The effective tax rate in the second quarter of 2018 was 19.4% compared to the effective tax rate of 24.5% and the pro forma effective tax rate of 21.4% in the prior year quarter (see attached table for reconciliation of this non-GAAP measure). The decrease in the current quarter effective tax rate is primarily due to the benefits from U.S. tax reform.
In the second quarter of 2018, we generated $224 million of net cash provided by operating activities and $157 million of free cash flow (see attached table for reconciliation of this non-GAAP measure). We continued to return cash to shareholders with our quarterly dividend of approximately $100 million. We ended the quarter with cash and marketable securities of approximately $2.4 billion.
2018 Guidance:
